While digitally transforming their procurement departments is a frequent goal of modern business organizations, the mere desire for digital transformation means nothing without a well-planned strategy for guiding the transformation through to a satisfactory completion. Only about 30 percent of all digital-transformation projects are successful, which means 70 percent of such projects are either failing to deliver all of the value they were designed to create when they got underway, or they are unqualified failures.
The goal of any organizational transformation is to move the organization from one stage into another. As with any transition with a business objective behind it, digitally transforming procurement in a manner that meets executive expectations is more likely to be successful if it is executed in accordance with a timeline guided by reasonable goals for implementation.
How technology helps procurement transformation
Generally speaking, the procurement process is the same at any company. However, in recent years, procurement has matured and moved from a transactional model to a collaborative model. This means procurement personnel are expected to manage spend, understand risk management, know who their suppliers are, recognize competitive pressures with regard to supplier selection, and have a goal of driving value throughout the organizations they serve.
Incorporating technology into the procurement process helps to bridge the gap between transactionality and innovation. The point at which this becomes essential is at the midway point, where procurement is able to evolve from being a sourcing factory to a collaborative and high-performing institution.
It is arbitrary to say there is only one way to use technology to transform procurement, but experience has shown that an agile approach is more effective, where small changes can be made smoothly, and without causing massive procedural disruptions to an operation. This is in comparison to a big-bang approach, where sweeping changes are made across large organizations, often before any benefits of the new technology have been adequately proven, or before unforeseen issues have been unearthed.
Applying changes in a progressive fashion allows the leaders of the change to learn and adjust along the way, and to improve the delivery and quality of the changes. This helps to create trust and a higher level of adoption, which is the key to delivering the return on investment that is expected at the outset. This is critical in the area of stakeholder management, because people are more likely to embrace a process if they feel they have an opportunity to contribute insight to its development.
Why is a plan necessary?
Organizations that are investing in building strong procurement practices are directly improving the financial performances of their companies. According to a McKinsey study, organizations classified as “procurement leaders” enjoy substantially higher procurement savings, a greater annual reduction of cost of goods sold, and a much higher average EBITDA margin when compared with companies classified as “middle of the pack” or “procurement followers.”
Moreover a study from WNS-Denali shows that CPOs are strongly invested in digitization, with more than 50 percent considering it to be a top priority. Roughly 83 percent of surveyed CPOs have already implemented some digital tools, but 43 percent of that group say they aren’t consistently seeing value from those digital tools. This may be attributed to the fact that only one third of CPOs have clear and documented visions for their procurement organizations, while three fifths fail to track process efficiency as an operating metric. This is an indicator that some companies are only tracking cost savings without concentrating on customer satisfaction and cycle times.
Further, half of CPOs have no stakeholder communication plan to inform key parties about the digitization process, while roughly one third have no change management plans in place. These are critical tools for maximizing adoption and engagement, but far too many CPOs pull the lever on implementing sweeping digitization strategies without having these tools in place.
Leading a digital transformation
In order to successfully lead a digital transformation within a procurement department, you must establish governance and operating principles, and make sure they’re clear. What if there is an issue and something comes up that requires a change? If you have a great cross-functional group that can react to a change, having a nimble group that can make quick decisions and communicate in a sophisticated way can help you change your operating model.
Without question, change management can be straightforward if you think about the process from the perspectives of those who are going to be most affected. Collaboration is critical, because procurement touches the lives of everyone in the company. Every department buys something in order to execute its portion of the organizational vision, so procurement can’t be isolated within its own silo without harming the rest of the organization it is designed to serve.
Focusing on value
Most procurement personnel have a natural tendency to focus on savings, but the primary goal of the department and any digitization initiatives should be value creation. Stakeholders will be more collaborative if you have value-based discussions with them as opposed to savings-based discussions. If everything else is being done correctly within a digitization project, savings will be a natural outcome, so more focus should be placed on the value that digital transformation will have on the procurement team, and how that will benefit the rest of the organization.
Having buy-in from executives is crucial, because no change can be effective without it. However, the majority of all stakeholders are dispersed throughout the organization, and most of the proposed changes will have the greatest influence on the day-to-day activities of those employees as opposed to the activities of the executive team. Therefore, it is vital to engage with stakeholders on multiple levels, and across multiple departments of your organization. Make sure every department—from IT to accounts payable—knows what is in it for them, and how the changes will be beneficial to them in the long term.
Success should be clearly defined so that everyone knows what success looks like and is able to come to an agreement about what a successful implementation of the strategy looks like. This also helps the organization to establish and celebrate milestones.
In some cases, organizations may need to evaluate their existing procurement teams in light of their future operating models on the other side of the digital transformation. By automating and simplifying processes, an organization’s leaders may realize that some individual contributors are no longer suited to perform the new responsibilities of their positions. In these instances, some added training may be necessary to prepare them for their modified tasks, or they may need to be transferred to other areas where their expertise is better suited to yield a productive output.
Because of the reality that digital transformation will undoubtedly alter several peoples’ jobs, it is advisable to communicate to them that they are still needed within the organization, and there is no objective built around automating those employees completely out of the company. If this sentiment is conveyed properly, it can make the affected personnel less hostile toward the digital transformation. Then, they will see it as something that is being done for them instead of to them.
Benefits of a successful digital transformation
When digital transformation is effectively carried out, it leads to more visibility, faster execution, and better compliance. Acquiring greater visibility results in your organization knowing what is going on with its spend. Simply having a purchase order or an invoice in your possession is a poor metric for visibility, because large purchase orders frequently fail to isolate the component pieces within them on individual lines. Real visibility requires real time reports that companies can extract valuable insights from.
The desire for faster execution stems from the growing expectation that items should be delivered to companies within two days of their purchase, so procurement personnel have been pushing to shorten the timeframe between the instant an item is ordered and the moment it is delivered. With regards to policy compliance, that speaks to how often people are actually doing the things they are supposed to be doing. Usually, a lapse in policy compliance stems from employees being asked to follow a procedure that is too complicated, or a process that was not delineated clearly at the outset.
Most of these benefits of a digital transformation can be measured in six different areas, which include SLA and compliance enforcement, cost savings, improved data quality and reporting, improved operational efficiency, reduced risk, and increased spend under management. Improvements in these areas are undoubtedly worth the effort of bringing a procurement department through a digital transformation, but much of the success of digital transformation projects has been based on collaboration and communication. Taking the time to allow for mistakes to be made and learned from during the execution phase is key, and grants stakeholders the time to build trust in the changes. In addition, communicating clearly and openly throughout the process can turn potential adversaries into allies as procurement continues to move into a more value-add position in the organization.